TABLE OF CONTENTS In this chapter we have introduced briefly the basic concepts for IA, its effect on the effective tax rate, and the after-tax cost of debt. Also, we have presented the basic concepts for calculating the loss in exchange rate when we have debt in foreign currency.
In this case we performed a sensitivity analysis where different approaches calculated the value of the firm, including the typical approach of using constant discount rates to valuate a FCF.
The results are interesting. The differences between the results from the first three methods and the others range from 25.10% to 6.70%. The traditional constant WACC approach at 21%, with book value and the cost of debt equal to the IRR of the CFD is below the baseline comparison by 25.10%, whereas the traditional constant WACC approach at 18%, with book value and the cost of debt equal to the IRR of the CFD is above the baseline comparion by 6.70%. In the case of the levered value of equity, these differences range from ?46.70% to 12.50%, respectively.
We can refine our analysis and consider only four cases. All of the cases use the traditional WACC approach (two cases using market value and two using book value, Cases 4 to 7). The difference lies in the use of the cost of debt as the proportion of interest paid to debt and the IRR of the CFD. These four cases show differences ranging from ?3.70% (Case 6) to ?13.10%...
